In Charles Dickens’ novel David Copperfield , the character Wilkins Micawber is renowned for living beyond his means in the optimistic expectation that “something will come up.”
The Micawber mindset isn’t normally what one recommends to finance ministers as they go about their annual budget exercise. But this year, it may be just what Finance Minister Arun Jaitley needs as he goes about his pre-Budget interactions with various stakeholders.
Jaitley will likely be torn between the wisdom of fiscal prudence, on the one hand, and the merit of stoking demand — even at the risk of being fiscally imprudent — on the other.
In last year’s Budget (for 2015-16), Jaitley had set a fiscal deficit target of 3.9 per cent of GDP for this year, and a more rigorous 3.5 per cent for the next. But as the Mid-Year Review of the economy noted, the 3.9 per cent target may prove hard to meet, particularly because nominal GDP growth (that is, GDP growth without adjusting for inflation) hasn’t quite been as robust as the Finance Minister had budgeted for; it will grow only 8.2 per cent, against the Budget estimate of 11.5 per cent. This alone would raise the deficit by 0.2 per cent of GDP, the Review reckoned.
Chief Economic Advisor Arvind Subramanian has argued that this may not be such a bad thing in an economic environment where the outlook for exports is weak given the global headwinds, and private investments have been slow to take off.
Jaitley has, in media comments, made light of that recommendation, and suggested that he would abide by the fiscal consolidation goals he had set for himself.
But in fact, there is a case to be made for the Finance Minister to go against the conventional wisdom of fiscal prudence and wilfully give the deficit target a miss this year with the realistic expectation that enhanced public spending will decisively stoke demand, despite the ill winds that blow externally.
Chinese silver lining For a start, even though Indian markets have taken news of a Chinese manufacturing slowdown as unvarnished bad news, it comes with a silver lining: the prospect of lower commodity prices, and a weakened inflationary impact.
And although tensions in West Asia have the capacity to push up oil prices on speculative play, it’s fair to say that the production glut will limit any such hike.
Oil price cushion The NDA government has, if anything, benefited enormously from the oil price slump of last year, the more so because it hasn’t passed these on to consumers; in fact, it has hiked duties on petro-products to cushion itself to the point where the trade deficit has shrunk, and the prospect of a current account surplus seems more than plausible this year.
It’s not just the macro fundamentals that provide Jaitley the elbow-room this year to be expansionary. Sector-specific corporate bottomlines too have benefited from lower commodity prices, which will in turn lift domestic sentiment. And lastly, if economic growth can be maintained even at current levels, global moneybags will increasingly be drawn to our shores.
In short, despite all the grim tidings, the Indian economy is today on the cusp of benefiting from an auspicious alignment of planets. The case for a Micawber-ish Budget — and for betting on a better tomorrow — has never been stronger.